Delayed US Federal Reserve interest rate hike continues to put pressure on the USD

Enrique Díaz-Álvarez12/Oct/2015Currency Updates

Businesses around the world are looking into potential opportunities and risks arising from the ongoing weakness of the USD. With questions over whether or not the Fed’s rate lift-off will go ahead in December, many USD buyers are now looking to set exchange rates at their current levels to remove uncertainty. That being said, should the Fed continue to be unclear on its plans, we could continue to see the USD weaken even further.

In Europe, the fact that the single currency has strengthened considerably since July continues to surprise the business world. Data releases in the Eurozone continue to show weakness. All forecasts, both internal and external, suggest that we’ll see Euro weakness moving forward this year, which opens up business development opportunities resulting from current market conditions.

As for the emerging markets, our calls for some of the most oversold currencies are looking realistic, especially ZAR and IDR. Emerging market currencies were up last week, from anywhere between 2% (ZAR) to 7% (IDR). These currencies were oversold and presented a unique opportunity to hedge exposure at extremely cheap levels.

Major currencies in detail


News out of the UK last week did not support a February 2016 interest rate increase.

Firstly, the PMI index of business sentiment in services dropped a significant two points to 53.3, pointing to a more cautious investment atmosphere. The MPC also voted 8-1 to keep rates unchanged, yet again. The committee took note of the downside risks in global and domestic growth, though it didn’t seem unduly alarmed by either.

The Bank of England is unlikely to go from near unanimity on unchanged rates to a hike in just three months. Therefore, we are delaying our call for a first UK interest rate hike until the second quarter of 2016.


The key question in the Eurozone continues to be whether the ECB will expand its quantitative easing in response to the global economic slowdown.

The minutes of the September meeting were somewhat baffling in this respect. There was no explicit discussion of further easing but forecasts for growth and inflation were both cut significantly, each by 0.2% a year. The obvious contradiction here is worrisome, as it may point to a significant level of institutional disarray. We hope that the ECB can do better than repeat its platitudes regarding “structural reform” at its next meeting.

Industrial production data appears to have fallen in August, according to national reports. German production figures appear to be particularly affected by the emerging market slowdown, as August orders from outside the Eurozone plummeted again, after a sharp drop in July, even before any effects from the Volkswagen debacle are felt.

We maintain our expectation that the ECB will be forced to yield to reality and announce further monetary easing before the year is out. After last week’s rally, current Euro levels are very attractive at which to hedge exposure.


Last week saw one of the sharpest falls in the USD in recent months. The Dollar dropped against every other major currency, and overall was down 1.2% in trade-weighted terms. In terms of macroeconomic news there wasn’t much in the US last week.

Such news as there was mostly contradicted the weak message from the September payroll report. Initial jobless claims, job openings and business surveys all maintained their recent strength. This provides some validation of our view that the recent slowdown in payroll growth is a one-off, rather than a trend.

We did see a weak August trade report; the trade gap widened to $48 billion in August from $41 billion in July. We now look to the September retail sales report to help confirm or deny the apparent slowdown in job creation.

Every major piece of economic news takes on added importance as the Federal Reserve makes its decision on whether to hike interest rates or not in December of this year.


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Written by Enrique Díaz-Álvarez

Chief Risk Officer at Ebury. Committed to mitigating FX risk through tailored strategies, detailed market insight, and FXFC forecasting for Bloomberg.